In a report published today by the Committee on Payment and Settlement Systems (CPSS), central bankers highlight issues related to the clearing and settlement infrastructure for repos that have the potential to affect the resilience of repo markets, and recommend that stakeholders in each market review options to further strengthen the repo clearing and settlement infrastructure.

The report, Strengthening repo clearing and settlement arrangements, first presents a comprehensive survey of the clearing and settlement arrangements for repos in selected CPSS member countries. In particular, it sheds light on the experience with these arrangements during the financial crisis. The analysis shows that repo clearing and settlement arrangements vary considerably across countries and markets.

Second, the report identifies several issues related to clearing and settlement arrangements for repos that have the potential to affect the resilience of repo markets (eg the risks related to the extension of significant amounts of intraday credits within some repo settlement arrangements; the lack of transparency of some repo infrastructure roles, responsibilities, practices and procedures; concerns regarding the protection against counterparty credit risk in repo transactions; and inadequate capabilities for liquidating repo collateral in the event of a cash borrower’s default). Due to the substantial variety in repo clearing and settlement arrangements, the identified issues are not relevant to the same extent in each market. Finally, the report outlines options and measures through which these issues can be addressed.

The report concludes that it is worthwhile for the stakeholders in each market to review how the clearing and settlement arrangements for repos could be further strengthened. As a first step, the report suggests that the providers of such arrangements in each country should, jointly with market participants, regulators and the central bank, attempt to develop a common view on the relevance of the identified issues for their market. As a second step, each provider could then evaluate which measure or combination of measures would be best suited to address the relevant issues in its specific circumstances.

Notes to editors

The report Strengthening repo clearing and settlement arrangements has been prepared for the CPSS by a working group consisting of representatives of central banks that are CPSS members plus the Central Bank of Luxembourg and the ECB. The working group was chaired by Andy Sturm of the Swiss National Bank. Based on experiences from the recent financial crisis, the working group was commissioned by the CPSS to investigate the extent to which the clearing and settlement arrangements for repos – ie the practices, procedures and systems used for clearing and settling repos and liquidating a defaulting cash borrower’s collateral – contributed to the instability evident in some repo markets, and whether there is room for improvement.

The CPSS serves as a forum for central banks to monitor and analyse developments in payment and settlement arrangements and to consider related policy issues. The chairman of the CPSS is William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York. The CPSS secretariat is hosted by the BIS. More information about the CPSS, and all its publications, can be found on the BIS website at www.bis.org/cpss/index.htm.